Mark Taylor
Senior Editorial Manager
The UK’s financial regulator has said it plans to name firms and persons it is investigating as part of a new approach to enforcement, prompting a furious backlash from City of London figures.
Historically, the Financial Conduct Authority (FCA) has kept its probes under wraps until completion, often publicly noting its stance is to not discuss individual cases.
However, in a recent consultation document, it said it is exploring tougher warnings for businesses that breach rules, taking a name-and-shame approach.
“We will amplify the deterrent impact of our work by enabling firms to understand the types of serious failings that can lead to an investigation, helping them to change their own behaviour more quickly,” said Therese Chambers, joint executive director of enforcement and market oversight at the FCA. “Greater transparency will also drive greater accountability for us as an enforcement agency.”
Faster, targeted enforcement
The FCA said that firms will be given no more than one business day’s notice before any announcement is made, and may give no notice whatsoever if it needs to announce or give an update on, an investigation urgently.
Regulated firms are likely to have little chance to fight the publication decision or assess the impact it may have on the business in terms of reputation. Individuals will be named in exceptional cases.
As well as making more information on investigations public, the FCA said it plans to focus on a “streamlined portfolio of cases” that have the most impact and close lost causes faster.
“Reducing and preventing serious harm is a cornerstone of our strategy,” added the FCA’s co-head of enforcement, Steve Smart. “By delivering faster, targeted, and transparent enforcement, we will reduce harm and deter others.”
“The first rule of enforcement club is that you do in fact talk about enforcement club,” said Bradley Rice, financial services partner at Ashurst law firm.
“From the FCA's perspective, the proposals align with the image it is seeking to promote of itself as a proactive and assertive regulator,” Rice said. “The reality is that whilst it may, arguably, make life easier for the FCA, public announcements at the outset of enforcement investigations will have a huge reputational impact for the firms named.”
The FCA’s history of lengthy investigations
The length of time taken to bring misconduct cases has been a frequent criticism of the FCA in recent years. Under the leadership of previous enforcement boss Mark Steward, the number of open cases tripled between 2015 and 2022 to more than 600. With stretched resources, the average time for a regulatory or civil investigation case nearly doubled to 33 months during this time.
Four-and-a-half years after opening an investigation into the collapsed empire of fund manager Neil Woodford, the FCA is still probing the matter, whilst the London Capital & Finance mini-bond scheme scandal took five years to conclude with bans and fines for the persons involved.
“Although the FCA may be criticised where investigations it has announced are subsequently dropped or take a long time to investigate, increased visibility of the fact of an investigation being launched is likely to be welcomed by the Treasury Select Committee (who are responsible for scrutinising the FCA) and activist consumer/investor groups (who may feel aggrieved by the actions of authorised firms),” said Jake Green, Global Practice Group Head of Finance Regulatory at Ashurst.
Previously, the FCA has tried several measures to bring around faster resolutions. It has given more power over senior staff involved in cases rather than handing the responsibility for all decisions to a centralised committee.
The broadening remit of regulators and the growing volume and complexity of regulation by which firms are bound are prompting some supervisors to consider how to make the enforcement process more efficient.
Last year, the Bank of England said it wanted to halve fines for early settlement of cases.
How has the City responded to the FCA plan?
Response to the proposals, at least publicly, has been overwhelmingly negative.
“The FCA is going to get a torrent of feedback to this consultation,” said Samantha Paul, Senior Knowledge Lawyer at Bryan Cave Leighton Paisner who noted that she agreed with the criticism.
“The proposed new approach has the potential to do enormous reputational damage to firms which may have done nothing wrong. Once ‘named and shamed’ many firms will never recover,” said James Alleyne, Legal Director in the Financial Services Regulatory team at Kingsley Napley. “A case may be quietly dropped and the FCA may move on but the damage to the firm, its employees, and customers could be profound.”
The plans were described as a “worrying and somewhat sinister development” by William Garner, a partner at law firm Charles Russell Speechlys.
“We have recently been concerned about instances of ‘trial by media’ in the financial services sector and the sometimes very close relationship between the FCA and the press,” he added.
Oliver Pegden, Partner at Clifford Chance, called the proposals “significant change which raises a range of issues”.
“In recent years, the FCA has emphasised that enforcement is a diagnostic tool,” he said. “The purpose of the investigation is to get a full understanding of the facts - it does not indicate wrongdoing,” Pegden said 65% of enforcement cases are closed with no action, and questioned whether it is right that the early investigation phase is used for deterrence.
“What deterrent effect is served by naming firms who have not done anything wrong?” he said.
“Once the change takes effect, will the FCA experience pressure from third parties - select committees, the press - to provide an increasing amount of information by way of ongoing commentary, in the name of the public interest?” Pegden said.
He also questioned how the approach would work given the FCA’s overlap with other domestic and overseas regulators, namely the Competition and Markets Authority, Ofgem, and the Monetary Authority of Singapore.
“There is no mention of authorities with whose approach the FCA’s approach would be inconsistent,” Pegden added. “And there are important differences with those authorities the FCA does mention. Ofgem, for example, does not normally disclose its market abuse investigations.”
CUBE comment
“My name is my name,” said Marlo Stanfield in the TV series The Wire, who knew full well the value of reputations and respect, and how quickly it can all turn to dust when problems arise.
For regulated businesses, reputational damage can destroy share prices, turn away customers, and cause the firm to lose the confidence of important stakeholders.
For this reason, the FCA’s proposals to name and shame businesses it is investigating have spread panic across the City of London.
The simplest way to head off a potential PR headache is to ensure compliance programs are up-to-date, and that the organisation embraces an open and honest ethical culture.
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